In a commercial tenancy, a tenant may sometimes have space that they can no longer afford or need. Faced with paying for the excess space, a tenant may either request that the landlord terminate the lease (either in whole or only with respect to the excess space) or seek to either assign the lease or sublet the excess space.
Before deciding how to proceed, both the landlord and tenant are benefited by understanding their various options and the distinctions between them.
An assignment of the lease is the transfer to a third-party by a tenant of their entire interest in the lease without material changes to the terms of the lease and without the tenant retaining any reversionary interest in the lease. On the other hand, a sublease is an agreement between the tenant and a third-party, i.e. the sub-tenant. The subleasing of premises is typically a transfer from the tenant of all or part of the leased premises for a term shorter than their lease term with the Landlord. Therefore, the interest in the premises/lease reverts back to the tenant following the end of the sublease.
A similarity shared by both an assignment of lease and a sublease is that the contractual relationship between the landlord and tenant remains intact and in the event of a default, the landlord could enforce the lease against the tenant. However, in the case of an assignment, where it is specifically bargained for and included as a term of the assignment, the Landlord may release the tenant/assignor from future liability under the lease.
There are a number of factors that landlords and tenants should consider before deciding whether to proceed by way of an assignment of lease or a sublease. First, as commercial leases typically contain terms that deal with assignments and subleasing, a review of the lease would be necessary to ascertain whether an assignment or a sublease would be preferable. Second, factors such as the creditworthiness of a prospective assignee or sub-tenant, the financial viability of the tenant, and/or transaction costs are some of the factors that should be considered when making a decision as to how to proceed.
For further information on assignments or subleases, please visit our blog periodically for additional posts on these topics.